Investment commentary - 31 May 2011

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Financial markets fell in May as investors continued to reassess European debt issues, the stability in US economic growth and inflationary concerns in Asia. US annual GDP growth forecasts were revised down to 3%. Australian equities lost 2.0%, with the local market influenced by inflationary threats in key Asian export markets. Commodities along with oil and gold fell on a weaker global outlook.

Significant developments over the month were:

  • Domestic economic data was highlighted by the Q1 GDP figure which was down 1.2%. This was the largest fall in 20 years on the back of the Queensland
    floods (which saw a 2.4% fall in net exports). Employment was down by 22,100 along with a modest fall in house prices and softer credit growth.
  • The RBA left interest rates on hold at 4.75% in May, remaining happy with their “mildly restrictive stance of monetary policy.”
  • US economic data released in May indicated the economy had weakened in recent months. Employment, manufacturing and house price indices all were
  • The US Federal Reserve continued to leave interest rates on hold at 0.25%. However, the Fed appears resolute in ending the second round of its quantitative
    easing programme (QE2) in June.
  • In line with the US and Euro zones the Chinese PMI Manufacturing index fell, hitting its lowest level in three quarters (down from 52.9 to 52). The recent Chinese policy tightening measures in response to inflationary threats (last recorded in April at 5.3%) including interest rate increases (currently 6.31%) and an increase in the reserve requirement ratio to 20.5% all worked to slow economic activity.
  • Japanese real GDP for the March quarter fell 3.7% (annualised), far worse than market expectations of 1.9% as a result of the recent tsunami disaster.
  • The rating agencies have placed the credit ratings of Belgium and Italy on negative outlook as a result of continued political gridlock and a weakened economic and fiscal outlook. Greece continues to cause the markets concern with more funding required from the EU and IMF, conditional on cuts to its budget deficit – which have yet to be achieved. However, Euro zone data (in aggregate) was supportive of economic growth with GDP growing 2.5% overall for the year.
  • The oil price fell 9.8% to US$102.51/bbl.

Australian Shares

The local market fell in May in line with a global sell off across risk assets generally reflecting investor concerns on global growth and inflationary threats. The market was influenced by inflationary threats in key Asian export markets. The S&P/ASX 300 index returned -2.0% for the month, to finish the quarter -1.7%.

In contrast to the previous four months Large cap stocks (-2.3%) underperformed their Mid cap (0.2%) and Small cap (-1.9%) counterparts.

Defensive sectors including Telecom Services (+4.2%) Consumer Staples (0.5%), and Utilities (+0.4%) outperformed the market driven by the strong performance of Telstra (+4.6%) and Woolworths (+3.4%). Sectors which underperformed included Financials ex Property (-4.9%) and Consumer Discretionary (-3.1%) with Westpac (-10.4%) the worst performing stock.

Overseas Shares

In local currency terms, the MSCI World ex Aus index returned -1.2%. Due to the modest depreciation of the A$, the return for unhedged Australian investors was enhanced to +0.7%. Similarly to April, May saw Growth stocks (+0.9%) outperform Value stocks (+0.6%) in A$ terms, based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices.

In the US, the S&P 500 Composite Index returned -1.1%, the Dow Jones Industrial Index -1.5% and the NASDAQ Composite Index -1.2%, in local currency terms. In Europe, the FTSE 100 (UK) returned -1.0%, the DAX 30 (Germany) -2.9% and the CAC 40 (France) -0.3% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned -5.8%, Hong Kong's Hang Seng +0.7%, India's BSE 100 Index -2.7% and the TOPIX (Japan) -1.6% again in local currency terms. Emerging markets were flat over the month in A$ terms.


Domestic listed property trusts (A-REITs) were flat over May. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +1.6%.

Fixed Interest

The UBS Australia Composite Bond Index returned +1.3% for the month. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index returned +1.5% and +1.4%, on a fully hedged basis over the month respectively.


The A$ depreciated against all major currencies over May except the Euro. The local currency fell 2.6% against the US Dollar, 2.5% against the Yen, 1.3% against the Pound Sterling and rose 0.5% against the Euro. The A$ fell 1.4% on a trade-weighted basis.

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